INSURANCE

II.189.1

INSURANCE is a contract by which one party undertakes to protect the other, to a greater or less extent, against the pecuniary consequences of certain accidents to which men are liable, such as the loss of property by fire or shipwreck, or the loss of future earnings by sickness or death. I. The Need and Basis of Insurance. The material possessions which constitute the property of man are, aside from the destruction of value which occurs in consequence of their use, constantly exposed to all kinds of injuries and losses, which are occasioned partly by human actions and partly by the hostile forces of nature. Even human labor is not exempt from this destiny, and, as it creates property, its temporary or permanent loss is connected with loss of property, not only to the laborer himself, but also to those dependent upon him. Of course many of these dangers can be warded off by the owner himself. His power to do so increases with increasing education, which teaches him caution, makes him acquainted with the causes of the dangers, and enables him to protect himself against the inimical forces of nature. Education has, of course, the same effect upon the diminution of those willful and careless actions by which the rights of others are invaded. Against other dangers of the same sort, whose removal exceeds the strength of the individual, the state protects by its courts and police. But it is impossible for the individual or the state to protect against all dangers to property, even with the best intentions. In spite of education, in spite of the best ruled state, serious accidents will happen, such as sickness, which disturbs or ends human labor; premature death of fathers, which exposes the widows and orphans to want; conflagrations, hail storms, floods, earthquakes, bad harvests, cattle plagues, shipwrecks, accidents in travel, bankruptcies, panics, crises, etc., etc. Losses of property by such occurrences are unavoidable. It goes without the saying that such losses may easily become ruinous to those upon whom they fall, and may prevent them from again taking up any remunerative employment. Since the loss is unavoidable, there is only one course to meet it—restitution. But who shall make this? In the case of malicious or careless actions of others, there is a legal claim to damage from that person. But what if the offender is unable to meet the obligation, or can not be ascertained? What of those losses caused by natural forces or by accident? The loser must bear all the loss himself in such cases unless he is assisted by charity. But it will not do to rely upon this source, since, as it is purely voluntary, no claim can be made to it, either upon the state or the individual. Nor would it be desirable to do so, since individual independence would thus be impaired. Fortunately there is another way to replace these losses. Human society suggests it by affording a kind of help which is perfectly consistent with the self-respect of the receiver, viz., self-help. A loss which is distributed among many is scarcely felt by the individual. When, therefore, a large number of persons who are threatened by the same danger unite and declare the loss which may happen to any individual in the union from this danger to be a common one, i.e., to be a burden resting equally on all, a means of securing full restitution has been found. This will be made up by the shares of all members in the loss which by the terms of the society is to be a common one. By accepting the share which falls to him, every member secures the right of claiming full restitution in case a similar loss should occur to him. This is generally a small sacrifice in comparison with the advantage secured by it, which often consists in the averting of complete ruin. The injured party owes his security against loss, therefore, not to any act of another's liberality, but to his own resources realized by union with others. The help afforded has the nature of an economical undertaking, and rests, therefore, on reciprocity of service. The individual member helps the others make restitution and receives in return restitution from them. This reciprocal aid is afforded by the contrivance of insurance, which has acquired in modern times such great importance and extension. The matter is so simple and the principle underlying it so plain that it is astonishing that such an institution did not exist in ancient times, that it was not born until the middle ages and did not acquire a really great importance until within a comparatively recent period.

II.189.2

—II. Object of Insurance. We have described this in general already, but it needs a more careful definition. Not every direct or indirect loss is adapted for insurance. A loss intentionally inflicted by a person on himself can not be an object of insurance: the loss must be more or less accidental. It is not necessary, however, that the injury done shall be absolutely accidental. It is enough that it be accidental so far as the injured party is concerned, i.e., not intended by him but caused by the actions of other parties which he could not hinder. It makes no difference whether the action of others which caused the injury was done on purpose, or carelessly or in ignorance of the consequences. Even loss which occurs through one's own negligence, if it is not too gross, does not exclude from insurance. However, in the present stage of the development of insurance, accident plays the principal part, and, in insuring, regard is had first and chiefly to it. But the object of insurance is still more limited. The injury must not be of such a kind that it can happen at the same time to a very large number of the owners of those objects threatened by it, or that it threatens a small class of persons very often and most others very seldom or not at all. If the first were the case, the amounts devolving upon the individuals to pay in order to indemnify the rest would reach such a height that it would be better for each one to bear his own loss. If the second should be true, there would be, in addition, the fact that the number of participants would be so small that no considerable advantage could accrue from a distribution of the losses. This is the reason that losses from floods, earthquakes, volcanic eruptions, avalanches, locust plagues and war are not proper objects for insurance, and why even insurance against the damage by hail storms has never become universal. The loss to be insured against must be, further, capable of estimation by statistics; it must occur with a certain regularity; the causes and occasions of its now frequent, now rare occurrence must be known. And even if these can not be traced back to certain natural laws, yet the "law of large numbers" must be applicable, and the long-continued and comprehensive observations necessary to ascertain this must not be neglected. Otherwise, there would be no basis for a decision as to the practicability of insurance, and as to whether and how far it would be advantageous; and thus the sine qua non of a sound insurance would be lacking. The science of statistics is, therefore, of great importance to insurance. With its development not only will the existing branches of insurance gain a firmer foundation and a wider extension, but it will render possible the establishment of new branches hitherto unknown. Thus it is possible that with the further evolution of the statistics of crime, insurance against theft, robbery, deceit, etc., will have a future, while, on the other hand, the failure of insurance against hail and the cattle plague to become as wide spread and firmly established as fire or life insurance is to be ascribed mainly to our present defective knowledge of their statistics. Finally, the injury to be insured against must be capable of easy investigation, both as to the manner of its occurrence and its amount. The exact investigation of its origin is especially necessary when it could have been easily caused by the insured party himself.

II.189.3

—III. The Insurance Premium and its Standard. It has already been remarked that insurance is no one-sided transaction in which only one party gives and the other receives—it is not an act of charity. It rests upon service and counter-service, it is a contract. The service of the insured by which he acquires the right to indemnification for loss we call the insurance premium. It is the share of the total losses of all insured parties which the individual assumes when he joins the association. The premiums must also furnish the means of covering the running expenses, of accumulating the necessary reserves, of paying the interest on any borrowed capital which may be necessary, and, in case the insurance is undertaken as a business venture, of yielding a fair return on capital and labor to the undertakers. As a matter of course the amount of the premium can not be the same for every one insured, but must be regulated according to the eventual advantage which the insured party will get from the insurance. The value of the object insured is, of course, the most important element. The greater the value, the greater the injury which the loss of the same inflicts upon the possessor, and the greater the advantage which the latter derives from insurance. But there is also a second consideration. The insured objects are not all equally exposed to the danger, but some of them more and some less. In the former case the insured party will sooner and oftener be in a condition to make demands on the insurer than in the latter, from which it follows that in premium should be different in the two cases. The basis of the premium, therefore, is a double one, and consists in the value of the insured commodity and the degree of danger to which it is exposed. And it is only when the premium is fixed with reference to these two points that service and counter-service become equal. With a uniform rate of premium the possessors of the more valuable and more exposed property would have a great advantage over the others. The value of the insured object is generally easily ascertained and its determination can generally be left to the owner. For, as the premium varies with the value and is expressed in per cent. of the latter, and as the increase of the premium consequently tends to prevent over-valuation, there is no great danger in so leaving it, provided that no restitution shall be made in case of intentional destruction on the part of the owner, and that the sum paid shall in no case exceed the actual loss sustained. On the other hand, it is difficult to estimate properly the danger. This depends upon various circumstances and relations which can not always be foreseen. And even if these should be known, their effect is oftentimes very various. The degree of danger can be most easily determined in the case of life insurance, since it depends in this case upon the rates of mortality, with which we are tolerably well acquainted, owing to the statistics which have been carefully kept for several generations. In other cases we must rely altogether on the law of general average, which needs longer continued observations to establish it thoroughly, than any we have yet obtained. According as the insurance is temporary, i.e., relating to a single definite accident, or permanent, i.e., relating to such accidents in general for an indefinite period, the rate of premium will be different. In temporary or occasional insurances the rate varies merely as the sum of the actual or probable losses in one definite instance; in permanent insurances, on the contrary, as the number and extent of the losses during a giving period, generally a year. In permanent insurance the premium is, therefore, periodical and generally annual, and is paid regularly every year as long as the insurance continues. The premium, of course, like the payment of every other service, is subject to the law of competition, which begins to make itself felt when competing insurance companies meet each other in the same field. Economy in administration, great extent of business, which effects an evener distribution of losses, exactness and caution in insuring and estimating losses, careful regard to the degree of danger, and rejection of all hazardous risks, permit a reduction of the premium without depriving the institution of its ability to meet its obligations.

II.189.4

—IV. Systems of Insurance. The various systems of insurance may be classed, in the first place, as public and private, according as the insuring party is the state (or municipality) or an individual, either alone or in union with other individuals. The respective merits of the public and private systems of insurance will be examined when we come to discuss the relation of the state to insurance. There is another division of insurance systems into the industrial and mutual systems. The former has been sometimes called the point stock or premium system. These terms do not seem very happy, inasmuch as a private individual or a political organization may adopt the industrial system, i.e., the system in which the business of insurance is conducted for the same purpose as any other business, viz., to make profits for the undertakers, and since in both kinds the premium appears. Nor does the term "mutual" seem to be a good one, since all insurance is mutual and could not exist on any other basis. The only difference between the so-called mutual and the industrial systems consists in the peculiar way in which the principle of reciprocity expresses itself. While in the former case every participant is at once insured and insurer, and thus the element of mutuality appears directly, in the industrial system this takes place through a third party, the insurance undertaker, who assumes the rôle of insurer toward all insured and receives from them the premiums. In this system insurer and insured are distinctly opposed to each other in consequence of a division of labor. Instead of the owners of property performing for one another the service of insurance, they have this done by a third party who makes a business of it, and whom they pay for his services. The real distinction between the two systems lies in the speculative character which the industrial system possesses, and must possess, but which the mutual system lacks. The better terms, then, would be, the speculative and non-speculative systems.

II.189.5

—The mutual insurance system needs no capital stock. The means of repaying losses comes exclusively from the contributions, or premiums, of the members. If the losses increase, the premium must be raised in order to make full restitution, as it may be diminished with every decrease in the losses. The premium is, therefore, variable, and is determined by the losses to be made good. As no profit is intended, these two items correspond almost exactly, the premium including a small per cent., in addition, to defray expenses of administration. The simplest way to manage the mutual system is to reckon up, after the lapse of a certain length of time, the losses which have occurred within that period, and to distribute the amount necessary to make them good among the individual members in proportion to the value of their insured property and the danger to which it is exposed. The premiums are then paid in. Of course, there is no reference here to any estimation of probabilities in reference to the happening of any accident; the premium varies exactly with the actual losses incurred. On the other hand, annual premiums may be fixed which the insured parties must pay in advance, these to be determined with reference to the average of losses likely to occur within the space of a year. If the amount of the premiums exceeds the demand of any year, the surplus may be added to the reserve, or treated as a profit and written to the credit of the various members on their next premium. If the losses exceed the premiums, the deficit may be made up from the reserve, or, in case there is no reserve, must be made good by subsequent payments.

II.189.6

—In the industrial or speculative system the premium is a fixed sum, by the payment of which the insured party secures the right of complete restitution under all circumstances, and nothing more. The insured can not be called upon to make good any deficit nor can he lay claim to any share in the profits of the undertaking. If the premiums amount to more than the losses and running expenses, the surplus belongs to the insurer as undertaker. It is his profit—the only consideration which can move him to carry on insurance as a business. On the other hand, if the premiums do not cover losses and expenses, the insurer must bear the loss himself; he has no further claim upon the insured. It makes no difference to the insured whether there are many or few accidents, whether the damage done is great or small. The responsibility of the insurer in this system necessitates a capital stock, which is usually collected by the sale of shares. The nominal sums are not generally paid up in full, but only from 10 to 20 per cent. of the same. It is seldom that further payments are necessary; for the premiums must equal the losses and running expenses. The amount paid up is used in getting a fair start, and if anything remains it constitutes a guarantee fund. The losses would have to be enormous if this fund could not cover them, or if it could not be easily replaced if it were necessary to take a portion of it. Masius makes the statement that in the course of forty years there was only one case in fire insurance and ten in hail insurance where further payments toward the capital stock were necessary. In order to be sure of punctual payment, however, in case of need, the shares are generally in the names of the shareholders, and these must bind themselves to make further payments, if called upon. The paid-up capital must, of course, pay ordinary interest, and the premium must be arranged with reference to that also.

II.189.7

—Since the speculative system aims at a profit and can not exist without it, and since it needs, further, a capital stock on which it must pay interest, it does not seem probable that it can furnish insurance at the same rate at which the purely mutual system could do it, which does not care for profit and needs no capital. It would not seem, then, that the former could compete with the latter. For why should a man pay a higher sum than necessary for a given service? And yet we see that as a matter of fact the speculative system is not only able to compete with the mutual system, but is continually gaining ground upon it. Why is this? In the first place, the premium in the former is fixed; in the latter it is variable. Most men, if they have to make periodically recurring expenditures for any purpose, prefer a definite to an indefinite sum, as they know then what amount they must save and have at hand. And most men prefer to have the sacrifice which insurance demands measured in advance by a fixed sum, which they gladly pay even though it be higher than the average rate of the mutual system. For in this way they have one less variable item in their expense-list, and escape the unpleasant after-payments whose amount can never be determined beforehand. Further, and what is more important, the speculative companies, in spite of their profits and of their capital stock, often succeed in keeping their fixed premiums at the same height as the average rate of the mutual companies and sometimes even reduce them lower. They make this possible when they organize their administration simply, judiciously and economically; when they proceed with great caution in the acceptance of insurances, exclude objects of great risk altogether, accept very valuable ones only at a part of their value, and limit themselves to a certain amount in any one place; when they invest their premiums profitably and reinsure in other companies, and thus make them liable also. Of course, speculative insurance has the advantage over small mutual companies, since in the latter the distribution is not extensive enough to make the premiums reasonable. In short, here, as in other matters, the service which another renders us as a matter of business in return for pay, is frequently cheaper than that which we perform for ourselves. Some other advantages are claimed for the mutual system, but they are more apparent than real, and in no case important enough to give it the preference over the speculative system. A glance at the previous course of development leaves no room to doubt that the speculative system, even where it has as yet gained no foothold, is destined to take the lead. But it is desirable that mutual companies shall continue to exist side by side with the speculative companies, since their competition can not fail to have a good effect upon the latter, and they will find a wider field opening up to them whenever the speculative companies in their pursuit of gain lay themselves open to the charge of abusing the interests of the insured.

II.189.8

—V. Branches of Insurance. Insurance is divided into several different branches, according to the kind of accident insured against or according to the object insured. The branches which have won a firm footing are fire insurance, hail insurance, animal insurance, transportation insurance, life insurance, mortgage insurance, glass insurance, and re-insurance. The limits of the present article forbid more than a brief notice of the two or three more important branches.

II.189.9

—Fire Insurance covers those losses of property which occur through the destructive agencies of fire. Not every conflagration gives to the insured a claim against the insurer. If the fire arose from earthquakes or other unusual natural occurrences, or if it was occasioned by war or riot, no restitution is made, and of course none is made to him who caused the fire on purpose or through very gross carelessness. On the other hand, not only are damages paid which are occasioned by the fire, but those also inflicted in attempts to save the property. Fire insurance may be subdivided into insurance on buildings and on movable property of various kinds, including not only the furniture in a house but also instruments, machinery, supplies of agricultural commodities, etc. Some companies take both kinds of insurance, some only one kind. Certain objects are generally excluded from insurance, partly on account of their great risk, and partly on account of the difficulty of protecting the company from being cheated, such as powder mills, smelting works, glass factories, theatres, cash, bonds, stocks, etc. As in other insurance the premium varies with the value of the object and the degree of the danger. In the valuation of buildings the cost of rebuilding in case of total destruction is the standard. In the case of old buildings a deduction is generally made to allow for diminution in value from age. In the valuation of movable property the average price forms the extreme limit. Several circumstances affect the fire risk in buildings, such as the style of building, whether more or less fire proof; the business which is pursued in it; the commodities stored in it; the condition of the building and the purposes for which the neighboring buildings are used; the position of the building in reference to its distance from other buildings; finally, the condition of the fire companies and the means of extinguishing fires. Buildings are divided by the insurers into several different classes according to these circumstances, and the premium is graded accordingly. So far as movable property is concerned, the degree of risk is determined both by the kind of commodity and the character of the building in which it is stored. Full information on these points is absolutely necessary to a proper determination of the amount of the premium, and the applications for insurance to be filled out by the insured party should contain corresponding questions. The application forms are consequently of considerable importance, and the careful investigation of all statements made therein is a life-and-death question with the companies. This investigation is the business of the local agents who effect insurance in the names of the companies by which they are appointed. Very much depends, therefore, on the proper choice of such agents. The companies can be more secure if they require an official attestation to the truth of the statements in the application. Especial care must be taken to prevent the company from being exposed to loss by a too high valuation, or by insurance of the same object in several different companies. Over-insurance may be prevented, if the company never pays more than the loss actually suffered, and if the nominal sum is paid only in case it is equal to or less than the loss. Many institutions attempt to protect themselves by refusing to insure for more than a part of the value. This precautionary measure has the wholesome effect of leading the insured party to leave nothing undone on his part which may serve to prevent or diminish the injury; while, on the other hand, it has the great disadvantage that it does not fulfill the aim of insurance. A double insurance of the same object deprives the owner of all claim on either of the companies. As to the period of insurance, the mutual companies generally issue no policies for less than six months, and many of them not for less than one year. The speculative companies insure for one month or even less, but charge a higher premium for doing so, while they make, also, important reductions in premiums on policies which run for several years. After every fire which has destroyed insured property the company makes a careful investigation of the accident, not merely to ascertain the amount of damage done, but also to find out the cause of the fire, as in certain cases already mentioned, the company is under no obligation to pay the policy.

II.189.10

—Marine Insurance is the most important form of transportation insurance. Its object is the partial or entire cargo of the ship and the ship itself. It insures against the accidents which may happen to a ship during the sea voyage. The danger of such accidents depends upon the length of the voyage and the time necessary to make it, upon the character of the route, the season, the condition of the ship, the crew, and the degree of security from piracy. An experience of several hundred years has established pretty accurately the average number of such accidents, and their causes in the various seas, and the influence of the season on their frequency. As to the condition of the ship, there are companies of underwriters in the chief commercial cities, particularly in London and Paris, which keep experts in most seaboard cities of any importance throughout the world, whose business it is to investigate every ship coming in as to quality, condition and seaworthiness, and send them the information. On the basis of this information they classify all the ships yearly. The registers they keep are open to all marine insurance companies for a small consideration, and as they all make use of them they are acquainted with the facts in regard to any ship applying for insurance. They thus have little difficulty in fixing the premium according to the risk. The premium varies, of course, in the first place as the amount of the policy, and the latter as the value of the insured commodities. In fixing the amount of the insurance, so far as the ship is concerned, not only is its value but also that of its equipments and the costs of fitting for sea taken into consideration. The amount of insurance on the cargo is measured by the invoice value of the commodities, plus the costs of transportation to the place of destination, plus the insurance premium and some other items, among which is often found an imaginary profit of 10 per cent. The amount of insurance must not exceed the valuation; if it should do so in any case the company is not liable for the excess. The liability of the insurer extends to "adventures and perils of the sea, men-of-war, fire, enemies, pirates, rovers, thieves, jettisons, letters of mart and counter-mart, surprisals, takings at sea, arrests, restraints, and detainments of all kings, princes, and people of what nation, condition or quality soever, barratry of the masters or mariners, and all other perils, losses and misfortunes that have or shall come to the hurt, detriment or damage of said goods, merchandise and ship or any part thereof." But the insurer is not liable for losses occasioned by unseaworthiness, insufficient equipment, ordinary wear and tear, age, rottenness, or worm-eatenness of the ship, by the condition, decay or careless packing of the cargo, or by the fault of captain if he be owner of ship and cargo. The insurer is liable also to the insured for his share of the general average, by which is understood all injuries intentionally inflicted by the ship master on the ship or cargo or both, in order to save them from a common danger, and also all expenses incurred for the same purpose, for which ship and cargo are liable in common. If the ship should be laid under embargo by a belligerent nation, the owner has the privilege, after a certain length of time, to cede his rights in the same to the insurer and receive the insurance in full.

II.189.11

—Life Insurance is a misnomer, since it is not the life that is insured, but a certain sum of money which the insurer must pay to the heirs of the insured after the latter's death. There is a marked difference between life insurance and other kinds of insurance. The insurance of houses and goods against fire is a contract of indemnity against loss, and in like manner an insurance on human life may be regarded as indemnifying a man's family or creditors or others interested against the loss of future income by premature death. But it does not necessarily take the value of such income into account, nor does it relate to any intrinsic value of the subject of insurance, which is the life of the insured party. Again, in fire or marine insurance the loss may be either total or partial. In life insurance the event insured against can not take place in any limited degree, and there is thus no partial loss. And again (in the ordinary kind of life insurances), the event is certain to occur, and the time of its happening is the only contingent element. In other kinds of insurance the events are wholly of a contingent character. The ordinary case of life insurance is that in which the service of the insured consists in an annual premium, and the payment of the sum follows upon his death. The insurance may be effected upon a single life or upon two united. The insurance upon a single life may be permanent, if it exists for its whole period, or temporary, if it is effected only for one or more years or against some particular danger (such as would occur in a journey) without any reference to time. The insurance upon two lives (survivorship insurance) is effected in such a way that the insurance is paid only on condition that the first mentioned outlives the other. Other forms of survivorship insurances occur in which the amount is paid to the survivors of a series after the death of any member. A person is permitted to insure not only his own life but also that of another, although it is taken for granted that he has some special interest in the life of the insured party, growing out of business or relationship. Life insurance assumes other forms also. The insured party may invest a certain amount of capital at the time of paying his first premium, or his service may be limited to a single investment of capital. He may contract that the sum insured him shall be paid to him during his life after reaching a certain age, or when some accident may happen to him by which he becomes unable to work. Insurance can be effected for another party in such a way that a certain sum of money shall be paid to him on reaching a certain age. Such insurances are effected by the children's providence associations and the dowry associations. The children's providence associations accept either single investments of capital or yearly contributions from parents, which they make, as a rule, in the early years of their children's lives, and insure to the children a certain sum when they have attained their majority. The payments made for children who die before they become of age are forfeited to the associations, and the latter are thus able to increase the amounts insured to the survivors. In a similar way are managed the dowry associations, except that in the latter case the money is paid on the marriage of the insured party. Many other forms of life insurance might be enumerated—over forty different kinds have gained a more or less solid foothold—but our limited space forbids pursuing the subject farther.

II.189.12

—Without the assistance of an insurance office the ordinary individual would not be able to collect as large an amount of capital as he can by its aid. Even savings banks and other credit institutions, by means of which even small savings become profitable investments, can not supply the place of insurance companies. As a man does not know how long he will live, he can not tell how much he must save each year in order to leave his heirs a certain amount of capital. But even if he could safely reckon on a long lease of life and should at an early period begin to save, it is questionable whether he would have strength of character enough to continue his savings in the way he began, and to resist the temptation to abridge or cease making them altogether and to consume what he had already saved. A man is too easily led to do one or the other when he has complete control over his own savings. One consoles one's self with the hope of soon being able to make up for lost time. Thus, after even a long life the fruit of saving is relatively very small. So much the more insufficient for the needs of the family must be the savings of him who is cut off early in life. Life insurance helps over all these difficulties. It secures to the individual a substitute for the guarantee of life which he can never have, by putting him in a condition in which the advantages connected with an average length of life are assured him, and by fixing his service with reference thereto; it keeps him from touching the savings accumulated, by depriving him of control over them; it prevents him from growing negligent in his economy by making him lose all he has saved if he fails to pay one premium; it offers him, finally, in the insured amount a return for the sacrifices he has made, which is on the whole far beyond the average which any other plan would offer him. The pecuniary means of meeting their obligations are derived by the insurance offices from several sources. They come, in the first place, from the premiums which those pay yearly who maintain their policies, then from the money coming to them from temporary insurances, when the person has escaped the accident against which he was insured; from survivorship insurances, etc.; from the premiums of lapsed policies, and of those which they do not have to pay on account of violation of contract on the part of the insured (such as suicide, death in duels, execution, etc.); finally, from the income of premiums, etc, which they invest as soon as they are collected, so far as they exceed running expenses.

II.189.13

—The service of the insured party, the premium, varies with the amount of the insurance, and the earlier or later occurrence of the contingent event. As this event is generally the death of the insured, it becomes of the highest importance to ascertain how many years are likely to elapse between the time of taking the insurance and the death of the party. The most important element in this calculation is the age of the party insured, as on an average a young person has a longer life before him than an older one. The insurance offices must, therefore, obtain exact information as to the expectation of life at different ages. This knowledge, without which its whole work would be unsound, is furnished to a satisfactory degree by statistics which can boast of greater success in this field than in any other, and has given life insurance a firmer foundation than any other form of insurance. Statistical observations on the rate of mortality at the various ages, and on the average duration of life, are tabulated in the mortality tables, which, beginning with a fixed number of persons of the same age, show for each year the proportion of deaths in that number and the expectation of life of the survivors. The first mortality table was constructed by Halley in 1693. Many others have since been published. The later ones, of course, are more valuable, since they are based on a larger number of cases, and because there has been a marked change for the better both in the rates of mortality and in the expectation of life within the present century. Many companies now use the seventeen offices' experience table, constructed in 1840, and based upon the experience of seventeen offices from 1762 to 1840, embracing 83,905 policies. With the aid of such tables the premium can be determined, so far as the probable time of the death of the insured is concerned, with almost exact mathematical accuracy, for all the different ages. The general rate of mortality is, however, affected by all sorts of modifications, such as the condition of health, the mode of life and the occupation of the different persons. It is necessary, of course, to take all these points into consideration in passing upon individual applicants. Weak and sickly persons, particularly those suffering from chronic diseases, as well as those engaged in dangerous occupations, are very properly excluded from insurance. As a consequence, not only the agents of the company but physicians also must be consulted in each case, and their decision considered. In recent times some companies have been formed to insure the lives of such as are ordinarily rejected, but it goes without the saying that such institutions rest on a very insecure basis and can not probably increase to any great extent. The minimum and maximum of insurance effected on one life by one company is often fixed by their rules, so as to prevent, on the one hand, the accumulation of small policies attended with a relatively great expense of administration, and on the other, the payment of many large sums at once which might endanger their solidity.

II.189.14

—The reserve is an object of great importance to life insurance companies. Those who take out policies for life or for several years continue to pay the same annual premium which was fixed with reference to their ages on entering. They ought really to pay a lower premium at first, and as they grow older a higher one. The establishment of a uniform premium for the period of insurance which is calculated as the average of their yearly service, means, therefore, that in the early years they pay more, and in the later less, than the average rate of mortality would demand. It is necessary, therefore, for the company to save up the surplus received in the early years to cover the deficit of the later ones, when the risk increases. This accumulation is called the premium reserve. No solid institution with an eye to the future can afford to neglect it; it is one of the conditions of continued existence.

II.189.15

—Since the great development of railroads the Accident Insurance Companies have grown rapidly. A company was established in London, in 1849, for insuring against the consequences of railway accidents. In 1856 the business was extended to all sorts of accidents, and there came into use a system of premiums graded according to the risk supposed to attach to various conditions and occupations of life. Many other similar companies have been established in nearly all civilized countries, and their business is growing rapidly.

II.189.16

—Annuity Insurance is opposed to life insurance in two respects. While the latter insures the possession of new capital, the former converts capital on hand into yearly payments. And so, in life insurance the service of the insurer is not performed until after the death of the insured, while in annuity insurance it ceases at death. The early death of the insured is, therefore, as desirable to the office in the latter case as it is undesirable in the former. There are many different kinds of annuity insurance. The simplest form is that in which the payment of an annuity is assured until death to a person in return for the deposit of a fixed amount of capital. The insured begins to receive the annuity at once or at some later period, usually after reaching a certain age. An annuity payable in the future is called a deferred annuity. The claim to an annuity of the latter kind can be acquired by yearly payments. The amount of the annuity depends upon the amount of capital invested, and the yearly payments (if any), upon the rate of interest, upon the time to elapse between the contract and the beginning of the annuity (in the case of deferred annuities), and, finally, upon the probable duration of the annuity, which, since it ends with the death of the insured party, is determined from the mortality tables. An annuity can be insured to a company of persons as well as to individuals. If it be given in such a way that the annuity of each member after his death is divided among the survivors until the last survivor receives the annuities of all, it is called a tontine. This system of annuities has been adopted by several companies. Annuity insurance enables the insured to receive a higher return on his capital, either immediately or in his later years, than the ordinary rate of interest would give him, or to secure to his family after death a considerably larger income than he could usually accumulate and leave them. He could not do this from his own resources, but the annuity office offers him this opportunity—at the cost, it is true, of the loss of his capital, which becomes the property of the office. The resources of annuity offices are in general the same as those of life insurance companies.

II.189.17

—The other forms of insurance, although in some places well developed, are, compared with the preceding, unimportant. The guarantee of employers against the fraud or insolvency of their servants, has become of late years of considerable importance, carried on by the fidelity guarantee offices. Companies have been formed to insure against loss by hail, loss by cattle plague or horse diseases; to insure traders against loss from bad debts, money-loaners against loss from mortgages, etc., tradesmen against loss from breakage of plate-glass in shop windows, etc., etc. The practice of re-insurance has developed of late years into great importance. No one company, however large its resources, deems it prudent to undertake a risk to an unlimited amount in connection with any one locality or one kind of goods. An office might restrict its liabilities by refusing to insure to a larger amount than what it pleased to run the risk of, and although some offices have done so, yet the convenience of the insured and the interest of its own agents, to say nothing of other considerations, make it difficult for any office so to limit its responsibilities. It, therefore, issues a policy for the amount proposed to it, but reinsures a part with some other office or offices. Business to a very large amount is exchanged in this way, and there are some offices which professedly, and others which practically, live by the premiums paid over to them by other offices. Such a plan has many plain advantages for the public. It saves a man, among other things, all the trouble of hunting after offices willing to take heavy risks, since any one will take it.

II.189.18

—VI. The Economical Significance of Insurance. It would be a chimerical idea to expect from insurance companies that they would undo the work of destruction, restore the destroyed values, and thus make good immediately the loss to the national wealth. No power on earth can do that. What has been destroyed remains destroyed; what has been done can not be undone. The only thing that we can get from insurance is a substitute for what has been lost. This substitute can come only from the stock of existing capital, and must therefore produce gaps elsewhere. The one loss can be made good only by other losses. The great significance of insurance, its inestimable service, consists in this, that it enables us to furnish a substitute without diminishing the capital employed in production. The premiums furnish the means of indemnity, and they are so small in proportion that they can be saved from the running expenses. Destroyed capital is, therefore, by the aid of insurance offices, replaced by small surpluses of income, by small savings from personal expenses. And thus those far-reaching disturbances are avoided which the loss of so much capital would have caused in the national economy, since the individual injured would scarcely be able of himself to cover his loss without the use of his own or another's capital, and would, therefore, if not assisted, be compelled to limit his production. Of course, the accumulation of new capital is delayed by this method of indemnification, since the savings employed in paying premiums would often be invested. But a great point is gained if the existing capital is preserved unimpaired. The loss need not in that case affect the rate of interest on capital. Production suffers no limitation on its account, and there is, therefore, no diminution in the demand for labor—an unmistakable advantage for the laboring classes. And as the loss of invested capital may be prevented by a small outlay, insurance effects a material reduction of the industrial risk and consequently of the undertaker's profits, contributes thereby to an increase in the number of competing undertakings, and leads ultimately to lower prices of products. This is particularly true of commercial wares brought from a distance which could never be furnished so cheaply were it not for insurance. And thus production and consumption derive incalculable advantage from the way in which insurance companies procure the substitutes for the destroyed values. Without going any further into detail we may say that insurance has conferred the greatest immediate benefits on commerce, navigation and agriculture. Commerce and navigation could never have attained to their present wonderful development (a development of which antiquity and the middle ages never even dreamed) if transportation insurance had not stood by and taken upon itself the liability even into the most distant seas, for the danger which hourly threatened ship and cargo. As to agriculture, there are two branches of insurance which exist for its sake alone—animal and hail insurance. The former protects a very considerable and valuable portion of agricultural capital, the latter protects the agricultural product through all the stages of its growth until its maturity and its harvest, upon which fire insurance continues this service until its consumption or its sale, while it secures, at the same time, the dwelling and working buildings of the farmer. But the advantage of insurance does not cease with what has been said, it reaches much farther. By replacing the lost capital and thus preserving production in its usual course, it contributes to the extension of credit which sets in motion the power of capital, makes it accessible to unpropertied brains, and increases production to the full extent of existing capital. By insurance the insured gains more credit, and the danger of giving credit is less to the creditor. This effect is visible enough in the case of owners of buildings which are insured. It is still plainer when credit itself becomes the object of insurance, as in mortgage insurance, which enables a landlord to exploit his credit to its extreme limit. Insurance does not limit itself, however, to the mere work of replacing lost capital; it appears in one of its chief branches—life insurance—as the accumulation of new capital. Of course, we might feel tempted to oppose to life insurance as the accumulator of capital, annuity insurance as the destroyer of capital. And yet in spite of the fact that the latter has some dark sides, and sometimes in the case of tontines degenerates into a mere game of chance, it has its unmistakable advantages, which make it in more than one respect a necessity. There will always be a great number of persons who will be much better provided for, much more effectually secured against poverty by means of an annuity than by a fixed sum of money. Of what advantage to a person unable to work, or to one economically untrustworthy, is the possession of a certain amount of capital if it is not large enough for him to live on the interest of it. He can not employ it himself, and is consequently much better off in possession of an annuity. If, moreover, the interest on the capital which a man possesses is not sufficient to support him, and, in lack of any other source of income, he is compelled to encroach on his capital, a systematic consumption of the same, such as is secured to him by an annuity, is certainly much more advantageous to him, because it secures him a higher rate of interest until his death, while without its assistance in the uncertainty of the length of human life he is exposed to the danger of consuming his capital prematurely and coming to want in his old age. Life and annuity insurance exercise, moreover, beneficent influences which extend beyond the sphere of economical life, and are yet indirectly of great importance to it. The father is thereby freed from the tormenting fear of leaving poverty and distress as a legacy to his family, or of seeing them suffer when he, on account of age, has become unable to work. By comparatively small annual payments which he can save from his income, or by a small investment of capital in such an institution, he can secure a round sum of money or an annuity which will raise those dependent upon him above the fear of poverty or will procure for himself a pension in his old age. This prospect increases his self-confidence, encourages industry and saving, keeps him from useless expenditure, and favors the growth of an economical sense. Life and annuity insurances, therefore, contribute essentially toward establishing happiness and content in the family, and to strengthen the family spirit—that pillar of all social and political order. This moral influence inheres indeed in all branches of insurance, since all insurance rests on the basis of self-help, which has an undeniably moral value, not only on account of the above-mentioned personal and material conditions which every one who wishes to take advantage of it must realize in and about himself, but also in view of the effects it has upon him. It raises him above the sad necessity of relying in misfortune upon the pity and charity of his fellow-men, and saves him from the humiliating feeling connected with it. Whoever receives alms from others has lost his independence and can no longer consider himself their equal. In the consciousness of equality and independence lies the richest source of moral improvement Insurance, by opening up the way to an effectual self-help in a wide sphere, becomes, therefore, a moral educator, and a political one as well, since a free state in order to continue must have self-responsible, self-helping citizens. But quite as striking as the moral side of this self-help is the economical side. It reveals to us insurance as a contrivance which counteracts pauperism with a marked success. In numberless cases pauperism springs from such misfortunes as are the objects of insurance, and whose consequences can be avoided by taking advantage of it. If there were a universal participation in the various branches of insurance the sacrifice which the support of the poor demands of society would be very much less, and the public support of the poor, which is of very questionable advantage, and, therefore, condemned by many economists and statesmen, would be largely unnecessary. The presence of insurance offices in such numbers as to make them accessible to all, would justify the state in refusing public aid in all misfortunes against which they insure, for the sufferer who has neglected to insure is responsible for his own loss. When we consider, further, that we owe to fire insurance a better condition of our buildings, all sorts of precautions against fires particularly in manufacturing districts, and essential improvements in the fire extinguishing systems (which are in some places in the hands of the insurance offices); that transportation insurance has improved the construction of ships and other means of transportation; as well as contrivances for saving lives and goods in shipwrecks; and that animal insurance has led to a better treatment and a more careful management of animals, to greater attention to all kinds of animal diseases, and more frequent recourse to veterinary help; we can hardly doubt that insurance should be classed among the most beneficent and public-spirited devices which the mind of man ever conceived.

II.189.19

—VII. The State, and its Relations to Insurance. The first question arising in this connection is, naturally enough, Should insurance be a public enterprise undertaken by the state or municipality? Insurance was first introduced into many of the continental nations by the government, and for a long time nearly all insurance was effected by the state. Even now many cities and states carry on some particular branches of insurance. The history of insurance justifies us in laying it down as a rule, with few exceptions, that the state should not attempt to perform the office of insurer. Wherever private institutions have been allowed to compete with public ones they have slowly but surely driven them from the field in spite of many obstacles placed in their way. Nor is this surprising. The state is not suited to prosecute speculative insurance, because it lacks all those qualities which are necessary to the profitable pursuit of an industrial undertaking. The zeal animating a private undertaker to attain the greatest possible results with the least possible expenditure, and to appropriate to his own use without delay for this purpose every technical improvement, is foreign to the state, nor has the latter the same watchful eye for the wants of the public as the former. Since the industry must be carried on by hired servants whose slack zeal needs constant supervision, everything which the state undertakes in the commercial or industrial field acquires a character of painful smallness and clumsiness; everything bears the stamp of bureaucracy instead of commerce. The state spends more and accomplishes less, and consequently it is at a disadvantage as compared even with those private associations which seek to satisfy their need of insurance by mutual institutions. For a private association has more freedom and less expense of administration. From which it is clear that those are seriously mistaken who expect a cheaper and better service from the state in such matters than from private companies. There are circumstances, however, we must admit, which not only justify but demand public insurance. If public spirit and a tendency to association are lacking in a people; if the desire for far-reaching undertakings has not shown itself, and at the same time an appreciation of the advantages of insurance has not yet grown up; in a word, if all the presuppositions of the establishment of insurance offices by private parties are wanting, then the state may wisely take the initiative and proceed with the institution of public offices. Otherwise, the nation might have to wait much longer for the introduction of these beneficent institutions. And yet, even in such cases, the state should aim at educating the people as soon as possible to such an extent that private enterprise would take the business off its hands.

II.189.20

—It is interesting to notice the very different attitudes of various governments toward insurance. Continental states began, as a rule, with the closest and most detailed supervision of the insurance business. To examine their laws on the subject, their limitations, prohibitions, precautions, etc one would think that they were intended to make a dangerous enemy harmless, instead of being intended to control one of the most beneficent of human institutions. Continental progress has constantly been toward a broader liberty, toward less interference. England, on the contrary, and particularly the countries of the new world, began with the utmost liberty and have been moving toward a limitation and supervision of the insurance business. Neither party will ever reach the point from which the other started, nor can it be said that any state has yet reached the true policy in reference to public control of insurance. Our American states have tried numberless plans, all of which have proved to be complete or partial failures. Nor has any scheme been devised of preventing huge frauds from being perpetrated on the public in the name of insurance. Governments have not even been successful in securing full publicity. Government inspection is open to the serious objection that, while it is notoriously unsuccessful and inefficient, it yet lulls the public into a false security as to the stability and soundness of inspected companies. The attempts of our state governments to control the insurance business have often had the effect of embarrassing and endangering perfectly sound companies and knocking the foundation of a solid business from under them. The legislation has been uniformly in the supposed interest of the policy holder. But, as often happens in legislation for a particular class, the matter is carried too far and results in injury where benefit was intended. Thus, any control which seriously increases the cost of insurance must redound, in the long run, to the disadvantage of the insured. Laws to prevent the forfeiture of insurances by the failure to pay premiums, and regulating the payment of surrender values and the grant of paid-up policies, are too favorable to withdrawing members and tend to weaken the companies by encouraging the retirement of the most healthy and profitable lives. In a word, the tendency of state supervision is "to interfere injuriously with honest and well-conducted companies and to afford but a feeble protection against those of a different class; to involve the state in the odium of failures which it is supposed to be its duty to prevent; to lessen the sense of responsibility among those who control the offices and the spirit of prudence and watchfulness among the public; and to place in the hands of public officials a power and influence which are apt to be abused and are always open to suspicion."

II.189.21

—VIII. Literature. The literature of the subject is large and constantly increasing. The articles on insurance in the various general cyclopædias contain brief and interesting summaries of information on special points. The article on Versicherungsaustalten in Bluntschli and Brater's Staatswörterbuch formed the basis of the present article, portions of it being simply an abridgment of the former. A very full summary of the literature on the subject in German is appended to the article just mentioned. All the standard works on political economy in German contain sections on insurance, treating it among the promoters of production. The special cyclopædias, in German, French, Italian and English, treat the subject with more or less completeness. Among the works in English the following deserve especial mention: the Insurance Cyclopœdia, by Cornelius Walford, a work now in progress and covering the whole subject of insurance; the British Blue Books, containing full information as to all British companies; the Reports of American Commissioners in the various states; Insurance Handbook, by Cornelius Walford; the Law of Fire Insurance, by C. J. Bunyon; Observations on the Rate of Mortality of Assured Lives, by James Meikle; the publications of the institute of actuaries in England; and the various periodicals published in the interests of insurance in Great Britain, Germany, France and America.

The cuneiform inscription in the Liberty Fund logo is the earliest-known written appearance of the word "freedom" (amagi), or "liberty." It is taken from a clay document written about 2300 B.C. in the Sumerian city-state of Lagash.